Monday, January 11, 2016

College Sports and Deadweight Loss: The amount of money generated by college sports is staggering: broadcast rights alone are worth over a billion dollars annually, and this doesn't include tickets sales for live events, revenue from merchandise, or fees from licensing. But the athletes on whose talent and effort the entire enterprise is built get very little in return. As Donald Yee points out in a recent article, these athletes are "making enormous sums of money for everyone but themselves." Even the educational benefits are limited, with "contrived majors" built around athletic schedules and terribly low graduation rates.

Since colleges cannot compete for athletes by bidding up salaries, they compete in absurd and enormously wasteful ways:

Clemson’s new football facility will have a miniature-golf course, a sand volleyball pit and laser tag, as well as a barber shop, a movie theater and bowling lanes. The University of Oregon had so much money to spend on its football facility that it resorted to sourcing exotic building materials from all over the world.

The benefit that athletes (or anyone else for that matter) derives from exotic building materials used for this purpose are negligible in relation to the cost. Only slightly less wasteful are the bowling lanes and other frills at the Clemson facility. The intended beneficiaries would be much better off if they were to receive the amounts spent on these excesses in the form of direct cash payments. This is what economists refer to as deadweight loss.

But are competitive salaries really the best alternative to the current system? I think it's worth thinking creatively about compensation schemes that could provide greater monetary benefits to athletes while also improving academic preparation more broadly. Here's an idea. Suppose that athletes are paid competitive salaries but (with the exception of an allowance to cover living expenses) these are held in escrow until successful graduation. Upon graduation the funds are divided, with one-half going to the athlete as taxable income, and the rest distributed on a pro-rata basis to each primary and secondary school attended by the athlete prior to college. A failure to graduate would result in no payments to schools, and a reduced payment to the athlete.

This would provide both resources and incentives to improve academic preparation as well as athletic development at grade schools. Those talented few who make it to the highest competitive levels in college sports would clearly benefit, since their compensation would be in cash rather than exotic building materials. But the benefits would extend to entire communities, and link academic and athletic performance in a manner both healthy and enduring. It's admittedly a more paternalistic approach than pure cash payments, but surely less paternalistic than the status quo.

KM: The fact is, guys have not done well over the last few years as asset prices generally have gone down. I don’t doubt that. But to say that you lost money in the worst asset crash in memory — and franchises haven’t gone down nearly as much as many assets have gone down — that’s not telling you you need concessions going forward.

If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren’t going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist. Should [the players] get credit for that? Should we get that money back? Now those are different people in some cases. They need to go get their money from the guys they bought the franchises from. That’s the guy who has all your money. Not us.

But who bought anything in ’07 that they’re happy with the price they paid? If you bought a house in ’07, if you bought stocks in ’07, if you bought bonds in ’07 — I don’t care what you bought, you’re not happy with the price you paid. When you buy at the top, you don’t make your money. That’s not unique to the NBA, that’s everywhere in life. But by and large, NBA franchise ownership has been a good investment. You can’t base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that’s not true.

Now, seriously, there are two ways to read this article, and one of them is substantially more right than the other. The first interpretation would foresee a massive replacement of sports writers with computers... The second interpretation would foresee the growth of a new service, the creation of stories for events that previously did not receive them — such as local high school games.

I think we will see more of the latter in the next few years.

First of all, the computers do not yet employ that extra verve or wordplay or attitude that makes for great sports writing. ... So the best sports writers are in no danger of losing their uniqueness, the voice that gives their writing value. Second, there is considerable demand for the second type of service. There are lots of sporting events played all over the country. A routine sports story would enhance a web page, and add just a nice element to a summary. Lots of places will pay ten dollars for that (which is what the price is today), and that price will decline with time.

Think about it: Much of sporting news follows a routine canon, a contest with ups and downs and comebacks and heroism and more. These are played out every day on high school playgrounds and in many others places, but the only stories ever written are those written in the heads of the right fielder. Now we have another source.